Jeremy Grantham and Howard Marks became investing legends by nailing huge market calls - but they disagree on what traders should do when a bubble is about to burst
- Jeremy Grantham and Howard Marks became investing legends with their historically accurate market calls, but they disagree on what to do when a crash is near.
- Grantham believes in waiting to get out until after the market has peaked, while Marks is content fleeing the scene early, even if it means missing out on some returns.
- In a pair of exclusive interviews with Business Insider, the two investing titans explained their differing approaches.
Everyone has a different take on when the next big market crash is coming.
But what often gets overlooked in those discussions is what an investor should do when they're convinced a meltdown is near.
One option is to flee the market before the bubble bursts. If a trader thinks a collapse is on the horizon, they might want to get the heck out of Dodge before the wreckage envelops their portfolio.
The drawback of this approach is, if a trader gets their timing wrong and exits too early, they're sacrificing big gains to the upside.
It's a conundrum that investors have faced throughout the latter part of the current bull market cycle. Experts have been crying foul for months, even years, about historically stretched valuations. And yet the market has continued to grind higher, seemingly unperturbed.
A second option is to let the crash get underway, then join the hordes as they rush to get out. This eliminates the risk of missing part of an asset's rally. And while it hurts to sell into weakness, the hope is that the gain realized on the way up will more than offset those losses.
Jeremy Grantham and Howard Marks - two bonafide investing legends known for their prescient market calls - represent the opposing views of this debate. It's important to note that their differing opinions stem from one core tenet: that it's impossible to perfectly time the market.
Here's a breakdown of each side, as told to Business Insider in a pair of recent interviews.
Jeremy Grantham: Wait until the market peaks, then sell
Why you should care what he says:
Grantham is the cofounder and chief investment strategist at Grantham, Mayo, & van Oterloo, which oversees $71 billion. He's become a world-renowned investor by predicting the dot-com and housing bubbles that wound up crushing markets.
His otherworldly prescience actually extends back to the late 1980s, when he called a bubble in Japanese equities and real estate.
Why he thinks it's better to be late than early:
"One thing you should be aware of, as an investor, is that if you get into a melt-up like we saw in 1999 and in the housing market of 2004-05, the decline phase is not that much faster than the rise. They're about symmetrical."
"So the risk of getting out after the peak, after three months, is no worse than getting out three months too early. And it's so easy to get out a year or two early."
"It's much easier to get out far too soon than it is to get out far too late. Because when the market goes, it tends to do so with a decent bang. You take a bit of damage, but it's actually very hard to take as much damage getting out after the peak, than it is getting out far too early."
"Everyone seems to be in mortal terror of being 'too late.' But it's no more dangerous and painful than getting out too late. In fact, it's much easier to get out closer to the peak on that side. Most of the glorious mistakes have been made getting out too soon."
Howard Marks: Get out early, even if it means sacrificing gains
Why you should care what he says:
In late 2008, during the deepest throes of the financial crisis, Marks - the cofounder and co-chairman of Oaktree Capital, which currently oversees $122 billion - came up with a daring plan. He decided to start buying billions of dollars' worth of cheap assets.
His firm began purchasing distressed corporate debt at a clip of about $650 million a week, something it continued throughout the last 15 weeks of the year. When all was said and done, Marks and his partner, Bruce Karsh, had amassed a whopping $10 billion position.
Their approach proved prudent - and wildly profitable. That debt rebounded, and the trade made about $6 billion for Oaktree investors and $1.5 billion for Marks, Karsh, and their partners, according to a New York Times report.
Why he thinks it's better to be early than late:
"If you're prudent and cautious and want to avoid the pain of the downswing, you have to accept that you won't garner the entire upswing. To think otherwise, you have to think you'll get out on the day it hits the top. That's pretty unlikely."
"If you're early, you're going to miss some gains. And if you're late, you'll be trying to sell into a difficult market where everyone else is selling. I'd rather be early than late, and I've always been too early. But I'd rather do that than be too late."
"You can't get it exactly right. Perfect is the enemy of good. Perfect timing is the enemy of good timing. The goal of investing is to have good timing, and there's too much randomness and uncertainty to expect to have perfect timing."